Economy picks up the pace with 2.8 percent growth in fourth quarter

The U.S. economy picked up speed last quarter, growing at a 2.8 percent pace compared to a 1.8 percent rate in the summer quarter of 2011, the Commerce Department reported Friday morning.

The higher growth reflects a mild acceleration of spending by consumers, who splurged on computers and electronics during the Christmas season, and big increases in business spending on investment in apartments and inventories.

Governments at all levels subtracted from growth, with federal spending cuts led by a huge drop of 12.5 percent in defense spending as the war in Iraq wound down. Cuts in state and local spending accelerated to 2.6 percent from 1.6 percent in the summer quarter.

Overall, the steady but non-spectacular performance of the economy has convinced most analysts that the expansion is here to stay and the economy will not slip back into recession this year. Worries about a “double-dip” downturn cropped up in the middle of last year, but have since mostly dissipated. Because of anemic growth in the first half, however, the growth rate for the full year 2011 clocked in at only a subdued 1.7 percent.

“This is the best evidence yet that the American giant is stirring from its slumber,” said Marcus Bullus, trading director at MB Capital. While the resurgence in growth was milder than expected, and both the economy and consumer confidence remain fragile, the re-emergence of stronger job growth makes this economic renaissance particularly welcome, he said.

“The likelihood is for a period of steady and unspectacular growth” this year, said Chris Williamson, chief economist at Markit. He said the pick-up in consumer spending, which is the biggest engine of growth in the economy, was “encouraging.”

A more worrisome trend, he said, was the big jump in business inventories, which accounted for much of the increase in growth during the quarter. Growth will slow in the coming quarters as businesses try to whittle down the bulge in inventories.

That indicates “the economy is less healthy than the headline growth rate would suggest,” Mr. Williamson said.

With government budget cuts deepening at all levels, the economy will not be able to grow fast enough or create enough jobs to significantly lower unemployment, which stands at 8.5 percent, said Josh Bivens, analyst at the Economic Policy Institute.

Since Congress already approved spending cuts that will affect much of the bureaucracy this year, and even bigger ones are looming next year, it will be critical for Congress to approve a full-year extension of the payroll tax cut and unemployment benefits to prevent a setback in the economy, he said.

John Silvia, chief economist at Wells Fargo, noted that consumer spending growth has averaged 2 percent in the current expansion, significantly slower than in past economic recoveries, because consumers have been held back by high levels of debt, falling home prices and paltry growth in wages. He expects that to continue as over-indebted homeowners wind through the painfully slow process of shedding debt and returning to financial health.